Retirement – Safe Withdrawal Rate

What You Should Know About The Safe Withdrawal Rate

Retirement, although a wonderful thing for people who have worked hard to get to a place where they can live comfortably without needing a job, can be a scary thing regardless of what you have put away. It’s important to prepare for retirement by knowing what you’ve got to live off of and what you need to get by, which is where the Safe Withdrawal Rate (SWR) comes in.

The SWR is the amount of money you can withdraw from your retirement funds without ever running out of money. If you’ve got low interest on your savings account, this rate is generally around 4 percent a year. It’s the rate that is most often quoted and is the rate that experts recommend for a 30-year-retirement.

The 4 percent number that’s frequently boasted is one that many have come to be skeptical of. The reason is that some people believe that the media has convinced people that such a number is still valid, but in reality it’s no longer relevant. Despite the skepticism, it’s been found that 4 percent rate has been accurate 96 percent of the time.

Social Security And SWR

You’ll need to factor your social security benefits into your SWR when determining what to withdraw, which can be difficult for people who retire earlier than the standard social security filing age of 70. Retiring earlier means you’ll need to withdraw from your savings, but you will need to calculate your future social security benefits into your withdrawal rate to make sure you’re withdrawing smartly and safely.

Prepare And Budget

When calculating your retirement portfolio and budgeting for how much you can spend each year, it’s extremely important to be aware and be prepared. A recent New York Life study showed that 77 percent of Americans over 40 years old don’t know how much of their retirement savings they can spend per year without risking outliving their retirement assets. In 2006, 90 percent of Americans did not know how much they could spend.

“There is a tremendous risk lurking in retirement—after years of doing your best to save, there is a risk of mismanaging that nest egg in retirement and running out of money,” Dylan Huang, head of Retirement Solutions with New York Life, said. “Turning your savings into income for yourself in retirement is not easy, but the first step is knowing that anything above five percent is way too high.” The survey also found that over half of Americans over the age of 40 overestimated the safe withdrawal rate.

One good aspect of the survey, Huang pointed out, was the fact that over half of those polled expressed interest in turning their savings into lifelong retirement income. 68 percent of pre-retirees also said they were interested in learning how to create retirement income.

“Without the peace of mind that pension income provided to previous generations, pre-retirees are the first generation that needs to turn their savings into adequate income in retirement on their own. It is a positive finding that they are open to finding out how to do that,” Huang said.